Input and Output prices: Mind the gap

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PPI data released today suggest increasing margin pressures on UK manufacturers in August.

 

The inflation data have been released today by the ONS. As expected, CPI inflation remained unchanged at 0.6% in August. This confirms our expectations of a limited pass-through of the exchange rate depreciation into consumer prices in the past month.

This also suggest that margin pressures intensified in August. While input prices edged up to 7.6% in the year to August reaching a new four-year high, the increase in output prices was still moderate and failed to offset the pickup in production costs. Indeed, factory gate prices printed at 0.8% in the year to August up from 0.3% in July. As we previously highlighted, the gap reflects that manufacturers still had not passed through the plunge in Sterling into higher output prices. And margins on export sales are not any better.

20160913Inputandoutputprices 

 

The trend across sectors is more uneven than we highlighted a month ago. In August, we start to see some repercussion of higher costs into output prices in some sectors such as rubber and plastics, non-metallic minerals and food and drinks. This is in line with our 2016q3 Manufacturing Outlook where manufacturers in those sectors reported a smaller drop in margins on domestic sales in the past three months. In contrast, capital goods sectors, such as mechanical equipment and electronics, are still under pressure.

 20160913pricesbyindustry 

 

As we pointed out in our 2016q3 Manufacturing outlook, margin pressures on domestic sales are likely to ease in the last quarter of this year. So we will continue to have a close look at producer prices in the coming months to see if they come close to our expectations.

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